Part 6: Results of 2007 tertiary education institution audits

Central government: Results of the 2007/08 audits.

6.1
The New Zealand tertiary education system includes all post-school education and training, from university research to industry training to Adult and Community Education courses. In 2008/09, government expenditure on tertiary education will total about $2.8 billion (excluding GST).¹

6.2
There are 31 public tertiary education institutions (TEIs) providing training, education, and research services in New Zealand. TEIs are Crown entities² independently governed by Councils whose functions are set out in the Education Act 1989. These Councils appoint Chief Executives (or, in the case of universities, Vice-Chancellors) to manage the TEIs.

6.3
The Auditor-General is the auditor of all TEIs, and any subsidiary organisations of TEIs.³ This Part provides some background detail on TEIs and their operating environment, and sets out the results of our 2007 annual audits of TEIs. The financial year for TEIs ends on 31 December each year.

What is the tertiary education institution sector?

6.4
The TEI sector mainly comprises eight universities, 20 institutes of technology and polytechnics, and three wānanga.⁴ In addition, many TEIs have established subsidiary organisations to carry out activities consistent with the functions and duties of a TEI, having decided that these activities can be more sensibly managed in a separate legal structure. For example, a number of the TEIs have established research companies, scholarship trusts, childcare centres, and student hostel accommodation centres.

6.5
The TEI sector has three distinct sub-sectors − universities, institutes of technology and polytechnics, and wānanga. Each TEI sub-sector tends to describe itself as distinct from the other two TEI sub-sectors. Each TEI sub-sector has established a national “umbrella” body to represent the interests of their TEI member organisations, foster collaboration within each of the sub-sectors, and facilitate a point of contact with external stakeholders. These are the New Zealand Vice Chancellors’ Committee, Institutes of Technology and Polytechnics of New Zealand, and Te Tau Ihu. TEIs also maintain relationships in their own right with stakeholders.

Governance and accountability arrangements

6.6
TEIs are governed by Councils. Most Council members are elected, although four are appointed by the Minister for Tertiary Education. The precise constitution of each TEI Council diff ers. TEI Councils must consist of not fewer than 12 members nor more than 20 members.⁵ Unlike some other classes of Crown entities, TEIs are not directly accountable to a Minister of the Crown. However, the Crown monitors the performance and viability of the TEI sector through the activities of the Ministry of Education (the Ministry), the Tertiary Education Commission (the Commission), and New Zealand Qualifications Authority (NZQA). We discuss the broad role of each of these agencies in turn below.

6.7
In certain circumstances, the Crown may actively support TEI Councils to govern their institutions. Sections 195A to 195D of the Education Act 1989 set out a graduated set of formal intervention powers that allow for different levels of support according to the TEIs’ individual situations. The powers range from requiring a TEI to provide specified information about the operation, management, or financial position of the TEI at a given time, to the dissolution of a TEI Council and appointment of a Commissioner to govern a TEI.

Roles and responsibilities of TEIs

6.8
Sections 180 and 181 of the Education Act 1989 set out the functions and duties of each TEI Council. These functions include appointing a Chief Executive, and ensuring that TEIs are managed in accordance with their Investment Plans. In discharging their functions, TEI Councils must ensure that TEIs strive to attain the highest standards of excellence in education, training, and research, and operate in a financially responsible manner that ensures the efficient use of resources and the long-term viability of the TEI.

6.9
Section 159ABA of the Education Act 1989 sets out the planning, funding, and monitoring framework of the tertiary education sector. This framework currently requires TEIs to prepare Investment Plans that set out TEIs’ responses to both the Government’s tertiary education priorities and stakeholder needs. The Investment Plans underpin Crown funding for the TEIs. TEIs are also required to prepare an annual report that includes, among other information, a set of audited financial statements and statement of service performance.⁶

What other agencies have a role in the tertiary education institution sector?

6.10
Three central government education agencies have a significant influence on the operation of the TEI sector.

Ministry of Education

6.11
The Ministry describes itself as having a leadership role in the tertiary education sector. This includes developing strategic policy for the tertiary education sector, carrying out relevant research and analysis, and monitoring the performance and capacity of the Commission and NZQA. The Ministry has little direct relationship with TEIs.

Tertiary Education Commission

6.12
The Commission interacts more directly with TEIs than the Ministry. The Commission is responsible for leading the Government’s relationship with the tertiary education sector, and for developing and implementing policy. The Commission implements the Government’s Tertiary Education Strategy, incorporating the Statement of Tertiary Education Priorities 2008–2010 (the strategy). The Commission works with TEIs (as well as other providers of tertiary education) to agree Investment Plans that outline how they respond to the strategy.

6.13
The Chief Executive of the Commission has legislated responsibilities for monitoring and assessing the operations and ongoing viability of TEIs. To do this, the Commission:

monitors TEIs’ finances, governance, and management;
advises the Minister on appointments to TEI Councils;
supports the development of TEIs’ governance and management capability; and
provides statutory intervention advice to the Minister and implements any decisions made.

6.14
The Commission meets regularly with most TEIs to discuss their strategies, financial management issues, and risks.

New Zealand Qualifications Authority

6.15
NZQA’s primary function is to co-ordinate the administration and quality assurance of national qualifications. NZQA performs an overarching quality assurance role in the tertiary education sector (except in the universities),⁷ and is in the process of revising the tertiary sector quality assurance system. NZQA reports that the new system will emphasise its aims to ensure that the tertiary education sector is equipping people with the right skills and abilities to contribute effectively to the economy.

Recent changes to the operating environment

6.16
The operating environment for the tertiary education sector has changed a lot in the last three years. The changes have mainly been to the planning, funding, and quality assurance frameworks governing the tertiary education sector. The focus of the reform process has been on developing a network of education and training provision, with each sub-sector and individual TEI making a distinctive contribution to that network. This is to help avoid unnecessary duplication and maximise efficiency.

6.17
The Government sets the broad shape of the network and the details of the strategy in consultation with the TEI sector. The strategy is designed to set out the Government’s expectations and priorities for the tertiary education system. The Commission describes the strategy as a five-year blueprint for a collaborative and co-operative tertiary system that contributes to the country’s national goals and is closely connected to enterprise and local communities.

6.18
Investment Plans are the new funding instrument for TEIs in the reformed environment. TEIs are responsible for responding to government direction and to the needs of their own communities and regional and national stakeholders. They do this by developing and agreeing Investment Plans with the Commission. Investment Plans cover providing education and training and research, and developing new or enhanced capability by each TEI. Government expenditure levels on tertiary education are now more certain, and based on a three-year funding path under the Investment Plan model. The funding path is based on inflation pressures, expected demographic changes, student demand, and competing priorities within and outside the education sector. Funding is introduced to support what is agreed in Investment Plans, and future funding is influenced by how well TEIs perform against their Investment Plans.

6.19
The new funding, planning, and quality assurance system was fully introduced in 2008, so 2007 was a transitional year. All TEIs were required to develop Investment Plans for 2008.

How are tertiary education institutions funded?

Tertiary education funding system

6.20
The Government sets priorities and determines both the total level of funding and the amount available for each tertiary education sub-sector. During 2008/09, the Government will provide funding of about $2,789 million⁸ to TEIs, most of which is administered by the Commission. This funding is distributed through a number of different funding mechanisms. Most funding is distributed through a bulk funding arrangement, involving a small number of separate but closely related funds discussed in Figure 16. These funds are all linked to Investment Plans and have a three-year baseline that is updated at each Budget.

Figure 16
Description of the broad funding system for the tertiary education sector

The Student Achievement Component ($1,533 million) is the most significant part of the tertiary funding system. It is the single largest source of revenue for universities, wānanga, and institutes of technology and polytechnics.* It provides subsidies for teaching and learning in mainstream tertiary qualifications (with most learners also paying tuition fees). Allocations are based on total student enrolments agreed in Investment Plans, and are calculated using a sophisticated formula with funding rates that vary significantly by the type of qualification and for each part of the sector. The Tertiary Education Organisation Component ($624 million) provides funding (mainly for universities, wānanga, and institutes of technology and polytechnics) to support a range of core roles, capability needs, and innovation not directly related to student enrolments. There are six elements within this component, of which the largest two are: The Performance-Based Research Fund ($236 million), which is used to allocate the bulk of the Government’s research funding to TEIs. This fund allocates funding based on assessments of research quality. It aims to raise the quality of research done in the sector and to help ensure that teaching at degree level and above is underpinned by research. The TEI Base Investment ($310 million), which provides funding to help meet the costs of institutional infrastructure and helps focus TEIs on their core roles and distinctive contributions. As well as the main bulk-funding arrangements, the Government operates a number of other funds (some of which are allocated through Investment Plans).

* It is also allocated to many private training establishments and other tertiary education providers.

TEI revenue sources

6.21
Government funding represents a significant amount of the total funding for TEIs. The actual amount of government funding has increased significantly between 2000 and 2007, although its proportion of the total amount of TEI operating revenue has remained stable at around 50% during that time.

6.22
TEIs also receive revenue from sources other than the Government – mainly student fees and income from research. Figure 17 shows the relative split of funding for the TEI sector against each of the main revenue sources (fees, research funding, and other revenue) for 2000 to 2007. It also shows that, while the bulk of tertiary funding goes to universities, followed by polytechnics and then wānanga, there has been some change in the proportions since 2000.

Figure 17: Funding for the tertiary education institution sector by revenue source, from 2000 to 2007.

Summary of tertiary education institutions’ 2007 financial performance

6.23
TEIs are required to keep proper accounting records and prepare annual financial statements. Figure 18 summarises the financial performance of the 31 TEIs for the year ended 31 December 2007.

Tertiary education institutions	Total operating revenue $m	Total operating expenditure $m	Surplus/(Deficit) $m
Universities
Auckland University of Technology	222.4	217.4	5.1
Lincoln University	82.9	84.3	2.8
Massey University	379.2	370.2	9.1
University of Auckland	740.8	718.4	22.6
University of Canterbury	257.5	244.8	14.0
University of Otago	491.0	458.8	32.1
University of Waikato	183.7	183.7	0.0
Victoria University of Wellington	289.4	272.7	16.7
Institutes of Technology and Polytechnics
Aoraki Polytechnic	23.9	22.2	1.6
Bay of Plenty Polytechnic	33.5	32.8	0.7
Christchurch Polytechnic Institute of Technology	78.9	72.5	6.4
Eastern Institute of Technology Hawke’s Bay	33.1	32.3	0.8
Manukau Institute of Technology	85.9	86.9	(1.1)
Nelson Marlborough Institute of Technology	29.5	29.3	0.2
Northland Polytechnic	31.2	32.7	(1.5)
Otago Polytechnic	49.7	49.7	0.1
Southern Institute of Technology	45.1	39.8	5.3
Tai Poutini Polytechnic	27.8	27.3	0.5
Tairāwhiti Polytechnic	21.4	19.9	(0.6)
Telford Rural Polytechnic	11.5	9.3	2.2
The Open Polytechnic of New Zealand	58.9	56.4	2.4
Unitec Institute of Technology	117.9	115.3	2.6
Universal College of Learning (UCOL)	52.0	49.6	0.1
Waiariki Institute of Technology	32.2	31.1	1.1
Waikato Institute of Technology	65.5	66.0	(0.5)
Wellington Institute of Technology	47.8	45.4	2.0
Western Institute of Technology at Taranaki	21.2	23.8	(3.7)
Whitireia Community Polytechnic	43.9	43.7	0.1
Wānanga
Te Wānanga o Aotearoa Te Kuratini o Ngā Waka	119.8	114.3	5.4
Te Wānanga o Raukawa	18.6	17.8	0.8
Te Whare Wānanga o Awanuiārangi	16.9	18.3	(1.5)
Totals	3,713.0	3,586.7	125.9

Source: Education Counts website (www.educationcounts.govt.nz).
Note: The surplus/(deficit) figures also take account of abnormal items. Some totals may not add due to rounding.

Tertiary education institutions’ audit results for 2007

6.24
The Auditor-General is the auditor of all 31 TEIs, and each of their public entity subsidiaries. He carries out the annual audit of TEIs’ financial statements, accounts, and other information that each of the 31 TEIs is required to have audited. The Auditor-General’s practice is to appoint auditors to conduct annual audits on his behalf.

6.25
In an annual audit, the auditor:

examines an entity’s financial statements, performance information, and other information that must be audited (statement of service performance);
assesses the results of that examination against a recognised framework (usually generally accepted accounting practice); and
forms and reports an audit opinion.

6.26
The audit involves gathering all the information and explanations needed to obtain reasonable assurance that the financial statements and other information do not have material misstatements caused by fraud or error. The auditor also evaluates the overall adequacy of the presentation of information.

6.27
We issue audit opinions for each TEI (usually referred to as “the parent accounts”), for each TEI subsidiary that is also a public entity, and for the combined entities that represent the TEI group (usually referred to as “the group accounts”).

Audit opinions for the year ended 31 December 2007

6.28
We issued unqualified audit opinions for all of the 31 TEIs in 2007. This means that the financial statements that we audited complied with generally accepted accounting practice, and fairly reflected each TEI’s financial position and the results of its operations and cash flows for the year ended 31 December 2007. These audit opinions also mean that readers of the TEIs’ accounts can be confident that the performance information reported by the TEIs fairly reflects their service performance achievements, as measured against the performance targets adopted for the year ended 31 December 2007.

6.29
We issued a number of non-standard audit reports in the broader TEI sector, either on group accounts or on the financial statements of subsidiary entities. Part 4 discusses the detail of these opinions.

Areas of focus in the 2007 annual audit

6.30
Each year, we highlight particular areas of focus for each annual audit. For the 2007 annual audit of TEIs, the areas of focus were procurement policies and capital asset management.

Procurement policies

6.31
Procurement covers all the business processes associated with purchasing, spanning the whole cycle from identifying needs through to the end of a service contract or the end of the useful life and subsequent disposal of an asset. We expect TEIs to follow good practice when procuring goods or services.

6.32
The Government expects public entities to conduct their procurement having regard to:

the policy principles set out in the Ministry of Economic Development’s Government Procurement in New Zealand, a Policy Guide for Purchasers;
the Auditor-General’s June 2008 good practice guide, Procurement guidance for public entities; and
the Auditor-General’s June 2006 good practice guide, Principles to underpin management by public entities of funding to non-government organisations.

6.33
We asked our auditors to check whether TEIs had policies applicable to their procurement activities, and whether the policies included, at a high level:

the principles of procurement;
the legal and ethical aspects of procurement;
the management of risks around procurement; and
guidance on procurement planning and processes.

6.34
Overall, we were disappointed with the quality of the procurement policies we examined in the TEI sector. There was a broad range of findings. A few TEIs had no procurement policy, while we assessed a number of other TEIs as having poor procurement policies or policies that needed improvement. We reported the findings of this work to TEI Councils in the management letters that accompany our audit opinion.

6.35
As part of the 2008 audit, we have asked our auditors to follow up on the extent to which TEIs have addressed the 2007 audit findings and recommendations about procurement. The results of this 2008 audit work will be reported to TEI Councils, TEI management, and us.

6.36
We have not yet examined the procurement practices of TEIs. Procurement practice may be an area of audit focus in future years.

Capital asset management

6.37
Capital asset management is the process of achieving optimal whole-of-life effectiveness of assets at minimum cost. Where asset management is, or should be, a significant part of an entity’s activities, the asset management process should be an important part of the entity’s decision-making and management control environment. The asset information, including depreciation, reported in the financial statements should also be aligned with the underlying information in the asset management plan.

6.38
Since 2006, the Treasury has been leading a programme of work around capital asset management in the central government sector. The Commission is leading a set of initiatives in the TEI sector that is aligned to the Treasury’s capital asset management agenda. These initiatives are designed to ensure more efficient and effective management of capital assets by TEIs, and a more strategic capital investment in tertiary education by the Government.

6.39
Given the size of the collective asset base of the TEI sector (about $7 billion), the Auditor-General expects TEIs to have an integrated asset management plan in place. As part of the 2007 annual audit, we asked our auditors to determine the extent to which TEIs had an up-to-date integrated asset management plan in place.

6.40
Some TEIs had plans for managing their capital assets. Generally, however, these plans did not meet our definition of an integrated asset management plan. Very few TEIs had what we could describe as an integrated asset management plan. This was disappointing, given the value of capital assets that many TEIs manage.

6.41 As part of the 2008 audit, we have asked our auditors to follow up on the extent to which our findings and recommendations from the 2007 audit about capital asset management have been addressed. The results of this 2008 audit work will be reported to TEI Councils, TEI management, and us.

1: We have excluded student allowance and student loan amounts, which can be estimated at about $900 million each year.

2: To preserve the academic integrity of TEIs, only certain provisions of the Crown Entities Act 2004 apply to TEIs. The applicable provisions are set out in Schedule 4 of that Act.

3: Schedule 1 of the Public Audit Act 2001.

4: The 31 TEIs are listed in Figure 18, where their financial performance for the 2007 financial year is summarised.

5: Section 171 of the Education Act 1989.

6: Section 154 of the Crown Entities Act 2004, section 220 of the Education Act 1989.

7: Quality assurance in the universities is carried out by the New Zealand Vice Chancellors’ Committee under sections 241 and 260 of the Education Act 1989.

8: Except where noted, all figures in this section are for the 2008/09 financial year, exclude GST, and include capital and operating funding.

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